By Senad Karaahmetovic
Yesterday, it was reported that activist investor TCI Fund Management wrote a letter to Alphabet (NASDAQ:GOOGL) CEO Sundar Pichai that the tech giant must take "aggressive action" to cut its expenses and headcount.
The hedge fund, which has a $6 billion stake in Alphabet, wrote to Google at times when the company is one of the very few tech businesses that hasn't announced major layoffs. Similar to Apple (NASDAQ:AAPL), Google only announced a hiring slowdown.
"Our conversations with former executives suggest that the business could be operated more effectively with significantly fewer employees," the letter stated.
The letter also said that Google increased its headcount "at an annual rate of 20% since 2017," which is "excessive."
"We acknowledge that Alphabet employs some of the most talented and brightest computer scientists, but these represent only a fraction of the employee base."
Instead of spending vastly on staff, Google should increase its share buybacks and set an EBIT margin target for its Google Services business. This unit posted a 39% EBIT margin in 2021 with TCI calling for "at least 40%."
Reacting to the letter, Bernstein analysts said they side with the activists and expect "Google will do what needs to get done, even if it's uncomfortable."
"In a world where no-one's leaving, Google finds itself in the uncomfortable position to maybe have to do something un-Google-like and cut heads," the analysts added in a client note.